World Economy

India's Modi gets ready to join inflation battle

An Indian man purchases vegetables from a roadside vendor.
Sajjad Hussain | AFP | Getty Images

India's new government has made fighting inflation its top priority, easing concern about the potential for conflict with the country's hawkish central bank.

Outlining Prime Minister Narendra Modi's economic plan to parliament earlier this week, President Pranab Mukherjee said the government would address bottlenecks that have caused food prices to rise more quickly in India than in other major economy.

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Annual consumer price inflation in India, Asia's third biggest economy, hit a three-month high of 8.59 percent in April – driven mainly by higher food prices.

The Reserve Bank of India has hiked interest rates three times since September to curb inflation and there was some debate before Modi's landslide election win last month about whether the new government would pressure the central bank to pull back from its hawkish inflation stance.

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"Despite worries that they [the government and central bank] would come with two different agendas, the finance minister has adopted a conciliatory tone talking about the need for inflation control and implementing measures, both short-term and long-term," said Radhika Rao, an economist at Singapore-based bank DBS.

"Of course much of this is still rhetoric and we have yet to see anything material," she added.

Still, analysts said it's a positive sign that India's new government is making the right noises about structural reforms to tackle inflation.

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According to reports in the local media, India's finance ministry is expected to submit a plan to address supply-side issues to tackle inflation to Modi soon.

Containing inflation is not an easy task, say analysts, since warehouse shortages, irregular supplies of vegetables in a mainly vegetarian country and weak infrastructure can all contribute to volatility in prices.

India expecting a lot from Modi: Indian industry chief
India expecting a lot from Modi: Indian industry chief

In addition, there are concerns that forecasts predicting below-average rainfall during this year's monsoon season could further fuel food inflation.

"Structural inflation in India is not going to go away anytime soon and raising interest rates alone is not going to help in the long run," said Vishnu Varathan, market economist at Mizuho Corporate Bank.

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"So it is gratifying that the government is stressing the need to control inflation," he said.

Economists said the next big focus in terms of Modi's economic agenda is the budget, expected in early July.

"The budget will be very important and the backdrop is quite challenging," said Rao at DBS.

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Modi has pledged to revive India's economic fortunes and the challenge for the new government is balancing that need to tackle inflation while lifting economic growth, which is running below 5 percent for a second year.

Optimism remains high that the government will deliver, with Mumbai's benchmark stock index this week hitting a fresh record high.